Dear Mr. Berko: You’re probably getting thousands of letters like this. My wife and I support my 79-year-old Poppa, whose only income is from an $81,000 CD and Social Security. We pay Poppa’s rent, which is $350 a month or $4,200 annually. He shares a duplex with a neighbor.
Poppa’s 7 percent CD comes due next week, and the best yield we can find is 4.75 percent. He was getting $5,670 annually on the CD, but if we renew, he will only get $3,840, or $1,830 less interest. And it gets worse.
My wife and I are Enron employees, and a year ago our joint pension plans were worth $195,000. I lost my job at Enron, but my wife has hers. Our pension plans are worth nothing. We’re both 57 and can’t afford Poppa’s rent because we must save all we can to make up for this terrible loss.
An insurance agent told us that he can put Poppa’s money in a “10-year certain immediate annuity” that will pay $565 a month for all of his life. That’s $1,008 more a year than the old 7 percent CD and $2,230 more than a 4.75 percent new CD. This comes to a good 8.4 percent return.
Dear L.C.: I’m terribly sorry about your Enron loss. For the purpose of this writing, an immediate annuity (IA) is a promise by an insurance company to pay an IA owner (the annuitant) a fixed sum of money (monthly or quarterly) until the annuitant passes away, even if he lives to be as old as Noah.
And “10-year certain” means that if Poppa passes away or gets hit by a speeding Budweiser truck in two years or four years, the insurance company will pay the beneficiary that monthly amount for eight more years till the “10-year certain” contract is complete.
The amount paid to the annuitant is determined by the interest rate earned on the money deposited as well as the age of the annuitant. According to actuarial tables, a male annuitant who is 79 will receive a higher lifetime income than another man who is 65. And a woman age 79 would receive less than a man of the same age because women have a longer life expectancy.
It is also important to know for tax purposes that the money you receive consists of two components: 1) A portion of Poppa’s check is the return of his original principal and therefore not taxable and 2) earned interest, which is taxable. There are a few other variables, but they are not germane to Poppa’s circumstances.
Now, your IA salesman is dangerous to Poppa’s financial health. Not all IAs are alike, and they can be as different as cheese and chalk. So when considering an IA, one must compare various companies.
For instance, Mutual of New York (MONY) will pay Poppa $735 a month ($8,820 annually) vs. $565 a month ($6,780 annually) from that two-penny fribbling company your agent represents. And because MONY has a 6.5 percent locked-in interest rate, about $6,174 of Poppa’s income is not taxed.
That’s enormously better, don’t you agree?
Dear Mr. Berko: Would you recommend real estate investment trusts with yields between 5.5 percent and 7.5 percent? I have between $13,000 to $14,000 to invest and do not own any REIT stocks in my modest portfolio. Since I don’t own REITs, I think it’s time to use some of my CD money to get a higher yield.
Dear G.W.: I suspect the following will make a positive difference in your income:
Corporate Office Properties Trust (OFC-$12.13) is a developer, manager and owner of 83 suburban office buildings in Maryland, New Jersey and Pennsylvania. Since 1997, revenues have increased from $34 million to today’s $126 million, and the dividend has increased annually from 50 cents to 84 cents. The dividend yields 6.7 percent, and regular increases are very likely. I’d place a two-year target price on OFC at $15, which is about a 16.5 percent average annualized return.
Equity Office Properties Trust (EOP-$28.92) pays a $2 dividend that yields 7.2 percent. EOP owns or has an equity interest in more than 670 office buildings and parking facilities totaling 126 million square feet in 24 states and the District of Columbia. That’s a diversified portfolio. Revenues and earnings have better than doubled in the past five years, and dividends have grown 60 percent. Bear Stearns is projecting a five-year growth rate of 10 percent, and analyst Tim O’Brien has a “buy” rating on EOP with a 12-month target price of $34.
Malcom Berko responds to every letter he receives; send questions to Berko, c/o Central Penn Business Journal, P.O. Box 1416, Boca Raton, Fla. 33429. Berko, senior vice president of the stockbrokerage firm Advest Inc., answers questions by mail or in his column free of charge. If readers want an in-depth analysis, they may be asked to become a Berko/Advest client.
Copley News Service